Poll: Is successful trading more dependent on skill than luck?

Do you think successful trading is more heavily based on your own skills (discretionary/mechanical) or the random luck of the market?

it's skill, cause it's all about exits.

"Fooled By Randomness" by Nassim Nicholas Taleb would be a good book for you to read if you want to go more in depth into this topic. It's a great book, one of my favorites.

Being in profit after 10 trades is luck (even I’ve achieved that!); remaining in profit after 1,000 trades means that you have somehow established a proven edge.

Almost everybody says that exits more important than entries, but nobody has ever been able to explain why.

David

I am assuming you meant no one has explained this to YOU, not ever.

have a read here on why exits are so important by Darkstar for most http://forexfactory.com/showthread.p...dge#post206698

and also read Trade your Way to Financial Freedom

I'll quote Van Tharp "Yet real money is made through intelligent exits-which allow the trader to cut losses short and let profits run."

To expand on that (which he does very well in his book), the reason exits are so important is because once you execute an order(entry), you have NO control over where the market is going to go. What you do have control over is when you decide to close that position.

Quoted from Van Tharp again " Unfortunately, once you are in a position in the market, the market is going to do whatever it wants to do-you no longer have any control over anything except your exits."

Starts to make sense right?
Mike

Mbqb11

I’ve read “Trade Your Way to Financial Freedom”, and I also subscribe to Dr Tharp’s e-mailed newsletters.

Sorry if this sounds high-handed, but simply quoting another person’s opinion doesn’t really prove anything. There needs to be readily demonstrable logic underlying the words.

For almost every trading theory you could ever devise, you can find an “expert” who will support it, and an “expert” who will denigrate it. There are folk who say that you should scale up, scale down, scale out. There are folk who recommend trading with the trend, others counter-trend. There are folk who trade mechanical systems, others who say they don’t work. There are folk who trade the 2% position size rule, others who recommend Martingale type betting systems. And so on and so on and so on........


It is mathematically self-evident that cutting losses and letting profits run will only work profitably to the extent that prices trend. So the question becomes: do markets trend (in the timeframe that you’re trading) more often than they don’t?

You can not control price moves any more when you are contemplating entry, than when you are contemplating exit. The only difference with exit is that you have money on the line, hence there are likely to be emotions involved.


Dr Tharp (and many others, e.g. Chuck LeBeau) believe that one can profit using completely random entries. Here’s an experiment. Try opening a long position whenever your method tells you to sell, and vice versa. If these folk are correct, your profit should be unaffected.

Darkstar’s post makes a passing reference to exits, and only in the context of breakouts. Trading in the direction of a breakout is NOT a random entry. The direction is not randomly selected, and neither is the timing. I suspect that people believe exit is more important than entry simply because they take entry for granted.

Sorry if I’m being pedantic, but I remain unconvinced. Feel welcome to reply, Mike, but I’ve no desire to get involved in an interminable argument on semantics. If your method works for you, trade it and I wish you every success.

David

please, I am not trying to start an argument just offering my opinion(as your posts are your opinions). If you are like most trader on this forum who are trading based on TA and other methods that have no real edge(exploiting ineffciency), then where is your edge created? Certainly not in your entries which you have no control over. So what do you have control over then? When you exit that position, how you handle a position once it is moving? I know for price action traders, this is the hardest part. Inside the james 16 pf, those that succeed with pa are those that have clear cut rules for their exits(sure our entries are important)

. I was simply replying to a comment that you made that no one has ever explained why exits are more important, when clearly it has been explained by numerous people. A more accurate statement from you would have been simply, that you don't believe that exits are more important.

just a question though? where is your edge? just curious

Enjoy the weekend and best to you,
mike

This is the real meat and potatoes of forex.... "What is your edge?"

I am a huge fan of backtesting (when done correctly, WILL show exactly would would have happened...) So, I have methods that were profitable in 6 years of backtests based on price action.

What happens when they suddenly stop performing as they had previously? Because fundamentals ALWAYS trump technical analysis, should we accept our successful trades are lucky that are based on TA?

Mike, sorry if my posts sound dogmatic, but I get really frustrated when I see people implying “entry is completely irrelevant” or (another favourite) “method is unimportant because successful trading is all about psychology”. I suspect that there are lots of newbies (like me, I’ve traded stocks and derivatives but I’m new to FX) who read these posts, and they give a misleading impression. It’s a mammoth task sifting through all of this material, trying to make sense of all of the wildly differing opinions.

It would take me a lifetime to read all the posts on this forum, but I’ve done my best to read as many as I can, and your Darkstar reference is one of two (the other is http://www.forexfactory.com/showpost...9&postcount=32) that I’ve found thus far, which for me, really capture the essence of what consistently successful FX trading is all about.

My own experiences (across more than 5 years) tell me that price movement is very close to random, which makes devising a consistently profitable trading system so challenging! I also expect that’s a big reason why there are so many conflicting theories, many of which will generate profit fortuitously, and/or while certain market conditions persist. But luck is not sustainable indefinitely. So I totally agree that one has to somehow find a recurring inefficiency, in order to obtain a real edge, one that is effective, on balance, across all market conditions. People say there is no “holy grail”, but a proven edge is pure gold: if exploited consistently, it is ultimately one’s ticket to financial freedom.

Markets are ultimately driven by sentiment, the response to changing economic conditions and indicators. Can sentiment be measured mathematically? Not easily, in my opinion! Participants come and go at different times, they live in different international time zones and hence trade at different times, and as mood, practicalities and changing experiences and circumstances drive, or restrict, them. Despite fear and greed being two of the most irrepressible human emotions, each participant brings to the table his own unique objectives, philosophy, tolerance to risk. All of these have a collective effect on price movement. For every strong opinion that price will rise, there must be one that is equally strong that it will fall, for without two opposing viewpoints there can not be a transaction. More underlying reasons as to why markets move in largely random fashion.

So as not to hijack this thread, how does all this relate to the original poster’s question: how much is luck, and how much skill? Without a proven edge trading can’t be anything more than pure luck. How much can be attributable to “skill” depends on the nature and extent of one’s edge. Losses are inevitable with any method, but one with an edge must ultimately prevail.

How does one know that one has an edge? By remaining in profit (which includes overcoming transaction costs) over a very large number of trades. Profit amounts to very objective proof!

How large does one's edge need to be? Mathematically, if one is trading (on average) 20 pip movements, and the spread is 4 pips, then to break even one needs an edge of 4/20 = 20%. If one is a longer term trader, trading 200 pip movements, then the edge required is 4/200 = 2%. And so on. The trade off being that, the longer the timeframe, the smaller the edge required, but the more slowly your track record of forward-tested trades progresses, hence it will take longer to prove your method.

You ask: what is my own edge? Well, I’m still trying to find one! Lately, my research has been slowed by illness. I suspect that finding, and honing, a successful method involves a lengthy process of elimination – sifting the gold from the dross – and I think my best bet now is to find a local mentor (I live in New Zealand), to fast track the process.

Best wishes
David

Great question, Tom, but at a guess I think it could be more complex than that. As an example, if there are enough fundamental traders who try to anticipate the outcome of a potentially high impact news announcement, then they could create trend(s) for technical analysts to exploit, before the announcement is even made. Then the outcome of the announcement may be an unexpected surprise, one way or the other; or it may not.

Given that there are a large number of announcements, we presumably have, at any point in time, both traders who are acting (whether fundamentally or technically) in anticipation of an upcoming announcement, and those reacting in the wake of a previous one. Hence I suspect that the market is always a dynamic collective of these “overlapping” viewpoints. Not to mention that, simultaneously, we have folk operating with different objectives in terms of timeframe, and there’s also a certain “correlation effect” occurring across the different currency pairs.

So is it a moot point as to whether fundamentalists or technicians have an advantage, in terms of timing, at any point? To answer a question with a question: can anybody with less than an omniscient window into the minds of the participants really know?

David

David I like how you have extended several levels into this. Merlin said Forex is a "cash market." My impression was that it was a futures market, where leverage is given to you based on unit size of the contract.

If I am correct, many banks use these contracts to hedge economics of their countries, which is an animal completely outside of trading. These banks are not "trading," but exercizing their contracts to hedge against the future.

Somebody please correct me if I am wrong. Thanks.

Yes ! Categorically if you hope for it to continue.

Sorry, Tom, I’m speaking about markets generally, and most of my past research involves the equities markets, as opposed to Forex.

My understanding is that you are correct. The Commitment of Trader (COT) charts illustrate graphically how the FX market broadly consists of “commercials” who are seeking to hedge their own business-related activities, like you described; large institutional traders; and small “amateur” speculators. Generally the hedgers and the traders are taking opposing viewpoints, which (judging by COT chart volumes) I assume provides much of the transaction traffic.

[Some possibly helpful references (use Google to find others):
http://www.shatterfield.com/cot.tutorials.php
http://www.investopedia.com/articles.../COTreport.asp
http://www.thepitmaster.com/cot/cot.htm
I guess this also raises the question as to whether COT data might be a reliable leading indicator..... but if it that was consistently the case, I expect it would be an integral part of the trading systems described on the forums ].

Anyway, this being the case, the mix of participants, and their objectives, is even more complex than what I described previously. The presence of the "commercials" suggests to me that it should be easier to find a participant who is willing to take an opposing view. However, especially where the FX market is concerned, I speak from the standpoint of math and common sense rather than with any real insider knowledge.

David

Albert Einstein said 5% luck 20% skills the rest is hardwork?
Imo skill beats luck in trading. I've even heard that you can train your luck (to become a skilled luck lol).

Luck usually dies when you trade for longer periods. If you don't believe me, go ask the guys in Las Vegas...


Thanks,

Nader

100% luck... so I need to gratitude for everything that make my good trade (other people methods, good setup, nice PC, enough healthy, friends, wife, kids, etc). cause I don’t want to be fooled by randomness and think that I’m so great that can beaten the market. Remember the market is us. I don’t know what other people thinks so I only can anticipate what they’ve been doing.

Sorry for my strange opinion....

oh God.. me one is 100% luck.. win all trade in feb, loss 3 trade in march due to human error...never loss yet in april... but it is all about luck....i'm lucky guys..
the secret? close at 10pips..:
forex is easy. do not argue with this..

Likely it's a case of the harder you work, the luckier you get. Or maybe it's the smarter you work...

I am a believer in skill. Luck is for gambling not trading.

"Shallow men believe in luck. Strong men believe in cause and effect."

-Ralph Waldo Emerson

"People always call it luck when you've acted more sensibly than they have."

-Anne Tyler

"Luck is the residue of design"

-Branch Rickley


WHAT IS YOUR EDGE ? Find one and you will be lucky all the time.

I say luck is when an opportunity comes along, and you're prepared for it.

-Juxta14